What is the Work Opportunity Tax Credit (WOTC)?

July 18, 2022
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Bringing more people into the workforce is one of the best ways for the government and businesses alike to build a stronger economy. To that end, the federal government created and extended the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire workers who might have a harder time entering the workforce. The perk – and a good one at that – is a significant tax credit between $2,400 to $9,600 for each qualified employee.

In this article, we will provide information on the requirements for qualification, the tax credit amounts, and how to apply for the credit.

Who qualifies for the tax credit?

An employee must fall into one of the following 10 target groups, as defined by the IRS, to qualify for the WOTC.

 

Target Group

Description

Qualified IV-A Recipient

An individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.

Qualified Veteran

A “qualified veteran” is a veteran who is any of the following:


  • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
  • Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
  • Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
  • A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
  • A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.

Ex-Felon

A “qualified ex-felon” is a person hired within a year of:


  • Being convicted of a felony or
  • Being released from prison from the felony

Designated Community Resident (DCR)

A DCR is an individual who, on the date of hiring


  • Is at least 18 years old and under 40,
  • Resides within one of the following:
    • An Empowerment zone
    • An Enterprise community
    • A Renewal community
  • AND continues to reside at the locations after employment.

Vocational Rehabilitation Referral

A “vocational rehabilitation referral” is a person who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:


  • A state plan approved under the Rehabilitation Act of 1973 OR
  • An Employment Network Plan under the Ticket to Work program, OR
  • A program carried out under the Department of Veteran Affairs.

Summer Youth Employee

A “qualified summer youth employee” is one who:


  • Is at least 16 years old, but under 18 on the date of hire or on May 1, whichever is later, AND
  • Is only employed between May 1 and September 15 (was not employed prior to May 1) AND
  • Resides in an Empowerment Zone (EZ), enterprise community or renewal community.

Supplemental Nutrition Assistance Program (SNAP) Recipient

A “qualified SNAP benefits recipient” is an individual who on the date of hire is:


  • At least 18 years old and under 40, AND
  • A member of a family that received SNAP benefits for:
    • the previous 6 months OR
    • at least 3 of the previous 5 months.

Supplemental Security Income (SSI) Recipient

An individual is a “qualified SSI recipient” if a month for which this person received SSI benefits is within 60 days of the date this person is hired.

Long-Term Family Assistance Recipient

A “long term family recipient” is an individual who at the time of hiring is a member of a family that meet one of the following conditions:


  • Received assistance under an IV-A program for a minimum of the prior 18 consecutive months; OR
  • Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; OR
  • Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.

Qualified Long-Term Unemployment Recipient

A qualified long-term unemployment recipient is one who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all or the unemployment period.

 

In addition to falling into one of the above target groups, the employee must:

  • Have worked at least 120 hours in the first year of employment,
  • Not be related to the employer,
  • Not have previously worked for the employer,
  • and not be, or be related to, a majority stakeholder in the company.

How much is the credit?

The amount of the credit is based on the target group, number of hours worked and wages paid to the individual. All credits are based on a percentage of first-year wages, except for Long-Term TANF Recipients in which credits are based on and provided over two years of wages.

 

Target Group

Worked between 120 and 400 hours

Worked at least 400 hours

Short-Term TANF Recipient;

SNAP (food stamp) Recipient;

Designated Community Resident;

Vocational Rehabilitation Referral;

Ex-Felon;

SSI Recipient;

Veteran unemployed at least 4 weeks;

Up to $1,500

(25% of $6,000 of first-year wages)

Up to $2,400

(40% of $6,000 of first-year wages)

Long-Term TANF Recipient

Not Available

Up to $9,000 (over 2 years)

(40% of $10,000 of first-year wages and

50% of $10,000 of second-year wages)

Summer Youth Employee

Up to $750

(25% of $3,000 of first-year wages)

Up to $1,200

(40% of $3,000 of first-year wages)

Disabled veteran hired 1 year after leaving service

Up to $3,000

(25% of $12,000 of first-year wages)

Up to $4,800

(40% of $12,000 of first-year wages)

Disabled veteran unemployed at least 6 months

Up to $6,000

(25% of $24,000 of first-year wages)

Up to $9,600

(40% of $24,000 of first-year wages)

Veteran unemployed at least 6 months

Up to $ 3,500

(25% of $14,000 of first-year wages)

Up to $5,600

(40% of $14,000 of first-year wages)

 

How to get the credit

In order to receive the credit, the employer must obtain a certification from the local state workforce agency verifying that the new hire is qualified as a member of a targeted group.

A job applicant may have conditional certification (ETA Form 9062) by the state workforce agency or partnering agency showing that they are tentatively qualified as a member of a target group under the WOTC program. This is often used by an applicant to make the potential employer aware of the credit if they are hired.

On or before the day an applicant is offered employment, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).

Within 28 calendar days of the employee’s start date, the employer must submit IRS Form 8850, together with ETA Form 9061 or ETA Form 9062, to the state workforce agency. If the employee does not have a conditional certification (ETA Form 9062), then the employer and employee must use ETA Form 9061 (Individual Characteristics Form). If the hired employee falls under the category of being a long-term unemployment recipient, they must also fill out ETA Form 9175, the Self Attestation Form.

After the state workforce agency has received the forms and approved the employee, the employer will receive a certification (ETA Form 9063) and can then claim the credits against their income taxes or Social Security payroll taxes depending on tax status.

The credit can be used to pay income taxes dollar-for-dollar up to the amount of their tax liability; it’s a non-refundable credit. Any excess credit can be carried back one year or carried forward 20 years.

Qualified Tax-exempt organizations who hire qualified veterans can claim the WOTC against their Social Security payroll taxes. The credit is limited to the amount of employer Social Security tax owed on wages paid to all employees for the period the credit is claimed.

 

The Work Opportunity Tax Credit is currently available until December 31, 2025, and there is no limit on the number of employees for which you can claim the credit. The purpose of this article is to provide an overview of the Work Opportunity Tax Credit. There are other rules and details beyond the scope of this article, so it’s important to discuss the WOTC with one of our expert advisors. If you are interested in learning more about the WOTC, please contact our office.

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